Category Archives: SEC

For a company that is dead in all meaningful respects, Nortel Networks has an uncanny knack of finding its way into the news. Just as late rapper Tupac Shakur’s posthumous song releases kept him in the public consciousness long after his untimely death, Nortel has its recurring scandals and misadventures to sustain its dark legacy.

Recently, Nortel has surfaced in the headlines for two reasons. First, there was (and is) the ongoing fraud trial of three former Nortel executives: erstwhile CEO Frank Dunn, former CFO Douglas Beatty, and ex-corporate controller Michael Gollogly. That unedifying spectacle is unfolding at a deliberate pace in a Toronto courtroom.

Decade of Hacking

While a lamentable story in its own right, the trial was overshadowed earlier this week by another development. In a story that was published in the Wall Street Journal, a former Nortel computer-security specialist alleged that the one-time telecom titan had been subject to decade-long hacking exploits undertaken by unknown assailants based in China. The objective of the hackers apparently was corporate espionage, specifically related to gaining access to Nortel’s intellectual property and trade secrets. The hacking began in 2000 and persisted well into 2009, according to the former Nortel employee.

After the report was published, speculation arose as to whether, and to what degree, the electronic espionage and implicit theft of intellectual property might have contributed to, or hastened, Nortel’s passing.

Presuming the contents of the Wall Street Journal article to be accurate, there’s no question that persistent hacking of such extraordinary scale and duration could not have done Nortel any good. Depending on what assets were purloined and how they were utilized — and by whom — it is conceivable, as some have asserted, that the exploits might have hastened Nortel’s downfall.

Abundance of Clowns

But there’s a lot we don’t know about the hacking episode, many questions that remain unanswered. Unfortunately, answers to those questions probably are not forthcoming. Vested interests, including those formerly at Nortel, will be reluctant to provide missing details.

That said, I think we have to remember that Nortel was a shambolic three-ring circus with no shortage of clowns at the head of affairs. As I’ve written before, Nortel was its own worst enemy. Its self-harm regimen was legendary and varied.

Just for starters, there was its deranged acquisition strategy, marked by randomness and profligacy. Taking a contrarian position to conventional wisdom, Nortel bought high and sold low (or not at all) on nearly every acquisition it made, notoriously overspending during the Internet boom of the 1990s that turned to bust in 2001.

Bored Directors

The situation was exacerbated by mismanaged assimilation and integration of those poorly conceived acquisitions. If Cisco wrote the networking industry’s how-to guide for acquisitions in the 1990s, Nortel obviously didn’t read it.

Nortel’s inability to squeeze value from its acquisitions was symptomatic of executive mismanagement, delivered by a long line of overpaid executives. And that brings us to the board of directors, which took complacency and passivity to previously unimagined depths of docility and indifference.

In turn, that fecklessness contributed to bookkeeping irregularities and accounting shenanigans that drew the unwanted attention of the Securities and Exchange Commission and the Ontario Securities Commission, and which ultimately resulted in the fraud trial taking place in Toronto.

Death by Misadventures

In no way am I excusing any hacking or alleged intellectual property theft that might have been perpetrated against Nortel. Obviously, such exploits are unacceptable. (I have another post in the works about why public companies are reluctant to expose their victimization in hack attacks, and why we should suspect many technology companies today have been breached, perhaps significantly. But that’s for another day).

My point is that, while hackers and intellectual-property thieves might be guilty of many crimes, it’s a stretch to blame them for Nortel’s downfall. Plenty of companies have been hacked, and continue to be hacked, by foreign interests in pursuit of industrial assets and trade secrets. Those companies, though harmed by such exploits, remain with us.

Nortel was undone overwhelmingly by its own hand, not by the stealthy reach of electronic assassins.

As stated in an SEC filing by 3Com, MOFCOM’s approval was the last of the required regulatory hurdles the acquisition had to clear. The parties expect to close the transaction on or about April 12, 2010. HP is expected to make a formal announcement on that date.

Prosecutors called it the largest-ever insider-trading case involving a hedge fund. U.S. Attorney Preet Bharara told a Manhattan press conference it was the first time wiretaps have been used to target insider trading, signaling the government will now use the same tools against Wall Street that it employs in organized crime and drug cases.

It’s long overdue, as far as I’m concerned. Incidents such as this one confirm that public markets have become rigged games where those with advance inside knowledge of material corporate events conspire to enrich themselves at the expense of those who lack access to such information. As trades involve buyers and sellers, those buying or selling with inside information are perpetrating grand larceny.

For a long time now, I have said that the racetracks of Santa Anita and Goodwood offer a better chance of an honest outcome than the public markets of New York and London. Greed is rampant on Wall Street, and it too often runs riot in the boardrooms of the information-technology industry.

Ask yourself: How often have you observed a technology stock whose shares have moved up or down sharply and unaccountably, well in advance of meaningful news? Sadly, it happens all the bloody time.

These individuals deserve their day in court, and it isn’t my place to pass judgment on them. That said, the wiretap evidence cited today appears damning. If they are guilty, I hope they are sent up the river for a good long time.

The integrity of the public markets depends upon the markets being honest and transparent. Justice must be done, and it must be seen to be done.

Dell, for example, must ensure that at least 60 percent of board directors will be independent (at least in name and in theory). In future, each director will receive training at Dell’s expense, and directors will have “complete and open access” to Dell management and employees without requiring coordination involving the chairman or board-liaison office.

That last provision, well intentioned but somewhat naive about the wily ways of the boardroom, will be a double-edged sword for Dell employees. In my experience, board members can have their own hidden agendas, often impenetrably opaque and inscrutable, not to mention intensely politicized.

While I understand that the provision is meant to foster laudable honesty, probity, and transparency within the company, I also know that board members cannot always be trusted to put the interests of a whistle-blowing employee above their own convoluted priorities. Employees best tread warily in that serpent’s den.

Still, in no way do I condone the dubious practices alleged to have been perpetrated at Dell. So let me make my position clear: I encourage employees to speak out emphatically on ethical violations and questionable business practices within their companies, but I also encourage them to document all relevant interactions and to consult counsel every step of the way.